Friday, November 3, 2023

Economic Conditions: November 2023

 It is a mistake for ringgit interest rate not to close its gap with the global interest rate which is the US dollar interest rate. With the differential of about two percentage points, it is inevitable that local ringgit funds will flow into US dollar funds for very obvious reason - to earn a higher interest rate. If the central bank for the ringgit refuses to act, as a matter of good policy, then inevitably, as more and more the ringgit are converted into the US dollar, there will be a local liquidity crunch in ringgit and the ringgit interest rate of Malaysian banks will have to rise to attract liquidity. While at the same time, there will have been a loss of US dollars which are being held as our international reserves. Maybe the higher global oil price have given the central bank more US dollars which it thinks it can afford to lose on the currency depreciation as a result of bad forex policy.

It is quite interesting to note that the government is always willing to challenge the workings of the macroeconomy at the global level. This has been shown in the past to be detrimental to the local economy.

In the meantime, the lower local interest rate (compared to the global determinant, the US interest rate) and the resultant lower ringgit, along with the higher price of oil (and hence of all operating costs), has led to a massive increase in inflation, namely, a rise in the rate of local prices increases. There is also no way that the government can cap market prices because to do so will result in a shortfall in production and supply as it becomes not profitable for goods to be brought to the market. Supply shortages will accompany price caps. Imports to make up for the loss of local production due to local price caps will inevitable result in imports being substituted for local output which, if this is long term, then the local economy especially of food production will be rendered incapable of competing with its equivalent imports. This is a serious situation for the long term when there is now realisation of the need to increase local food production in order to contain imported inflation. This will require a complete revamp of the local food supply chain to ensure that the whole chain is completely sourced locally. Local food production and its local supply chain should be a major of policy intervention by the government also a source of employment of the local workforce.

The government cannot continue to be a major source of employment for local graduates given that the cost of running the civil service is now very high and eats up the bulk of operating expenditure. Worse still, not a small sum is being used to fund pensions. It is a good idea for the civil service to be put on the local employment provident fund for two reasons. One, to ensure that civil servants also pay for their own retirements just like the private sector. Two, so that civil servants can be fired when they have proven to be not suitable for the jobs they are employed for. The downsizing of the civil service will be a step in the direction to reduce the layers for the corruption of the efficiency of the civil service system. Ministries and departments can be streamlined. 

The economic structure of the global economy is now quickly being re-engineered as the major global powers fight for dominance and a shift in the global economic axis. As a result, the global interest rate cycle is being reversed. The global economy has been slowing down ever since the advent of Covid, and the two structural changes in the global economy will ensure that the slowdown will continue. Higher interest rates and higher food prices will be the main features of the current global economy. For this small local economy to pretend that it can insulate itself from the tsunami of global macroeconomic adjustments is a foolhardy stance to take. 

It will still be painful, but there may be pain in fewer areas if the government allow the ringgit interest rate to track the US dollar interest rate and solves half the local economic problem in (a) local liquidity tightness, (b) threat to the international reserves, (c) higher imported prices. The other half of the problem still remains: (a) difficulty borrowers are facing with repayment as a result of lower income and now higher interest payments. The economic slowdown and the resultant weakness in the stock market is also causing problems to the property sector. Of course, the banks are also now being challenged through their loan portfolio to the property sector. The adjustments in the property and banking sectors are inevitable, and a higher local interest rate will aggravate the problem but it is not the cause of the problem in the first place. It is just a question of time for the macroeconomic adjustment to take place locally. The economy also seems to have a mind of its own as to how it will react to external signals and internal conditions.

Global superpowers have decided to make a change. The local economy must take precautions to mitigate as much as possible the coming consequences. Times will be tough.

Take care and all the best.

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